Under FHA mortgage guidelines on outstanding collections, borrowers do not have to pay unpaid collection accounts.

Whether it is a medical collection account or non-medical collection accounts, HUD, the parent of FHA, does not require it

However, with non-medical collection accounts, a percentage of outstanding collection balance is taken into consideration

If unpaid non-medical collection accounts total more than $2,000 dollars here is how it works:

FHA requires that 5% of the unpaid outstanding collection account balance be taken into consideration when the underwriter is calculating borrowers debt to income ratios

This can create a problem if the mortgage loan applicant has a large unpaid collection account balance

For example, here is a case scenario:

if the total unpaid collection balance is $10,000

then 5% of the unpaid $10,000 collection account balance or $500 per month will be taken into consideration

this amount will be counted as a monthly debt obligation by the mortgage underwriter in calculating the borrower’s debt to income ratios

this is a hypothetical debt borrower does not need to actually pay

The good news is if borrowers have a substantially high unpaid collection balance, FHA will allow borrowers to set up a written payment agreement with the collection account agency

That monthly payment agreement will be the amount that will be used as the monthly debt obligation in lieu of the 5% of outstanding collections balance

So on the case where borrowers owe the collection agency $10,000 case scenario:

instead of counting the $500 as the monthly debt obligation

if a borrower has a written payment agreement for $100

then the $100 will be used as the monthly debt in calculating the debt to income ratios

FHA Guidelines On Medical Collections

With FHA Guidelines On medical collections with an unpaid balance, the rules are totally different.

FHA Guidelines On Medical Collections are exempt from the above rules and regulations

No matter what the unpaid collection balance is on medical collections, it is not used to calculate debt to income ratios when it comes to income calculations

Unpaid medical collections can be ignored with FHA lenders unless the FHA mortgage lender has their own lender overlays where they override the minimum FHA lending guidelines

FHA Guidelines On Charge Offs

FHA ignores charge off collection accounts and considers it as zero balance.

However, you cannot have any credit disputes when it comes to charge off accounts

All credit disputes on non-medical collection accounts that are charge offs need to be retracted for the mortgage approval process to continue

If you are in the mortgage loan application and mortgage process and there are credit disputes on charge off accounts on non-medical collection accounts, the mortgage process will come to an immediate halt until the credit disputes are removed

Non-medical charge off accounts is exempt from this rule. FHA Guidelines on medical collections are exempt all the way around.

FHA Guidelines On Credit Disputes

If a borrower has credit disputes on unpaid collections and that the sum of the unpaid balances total $1,000 or greater on non-medical collection accounts, all credit disputes must be retracted in order for the mortgage process to go forward

For unpaid medical collection accounts, the FHA guidelines on credit disputes are exempt

Borrowers can have medical collection accounts credit balances no matter how much the unpaid medical collection balance is

Again, FHA Guidelines on medical collections are exempt

Borrowers cannot have credit disputes on the following:

Late Payments

Charged Off Accounts

Public Records

Any other derogatory credit tradelines with the exemption of medical collections and non-medical collections with zero balances

Gustan Cho and his team of licensed mortgage loan officers and support staff are experts in originating and funding loans with no lender overlays.
Over 75% of our borrowers represents are folks who contact us because they either got a last minute loan denial or were going through major stress with their original lender